The premium of Gulf Coast ultra low sulfur diesel to heating oil widened Thursday to 9.3 cents/gal, the highest it has been since October 4, when the spread was 10.25 cents/gal. 

On Friday, Gulf Coast ULSD was pegged at NYMEX March heating oil futures plus 6.95 cents/gal while heating oil was pegged at minus 1.80 cents/gal, an 8.75 cents/gal premium. 

The spread typically narrows in the winter months before widening in the spring, starting in early March. But this year, it is happening sooner. 

Trade in NYMEX heating oil futures has thinned out over the winter as players avoid it because of price volatility ahead of the change, said one Gulf Coast trader used to hedging transatlantic cargoes. The trader doubted he would buy NYMEX heating oil futures until a month after the new ULSD-based contract when trading had settled down. 

The spread is typically 2 cents/gal-5 cents/gal in the winter and 6 to 10 cents/gal in the spring. 

At 11:40 a.m. CST, the NYMEX heating oil contract was trading at $3.0986/gal. 

The spread between the two paper contracts has followed the physical spread and blown out to the nine cent range earlier than usual. In the last three years the paper spread has usually reached the 9-cent mark between late March and early April as winter heating oil demand wanes and diesel demand picks up. 

Gulf Coast ULSD paper differentials were heard talked at the NYMEX March heating oil swap plus 7 cents/gal, while Gulf Coast heating oil paper differentials were talked at minus 3 cents/gal, resulting in a spread of 10 cents/gal. The current spread is about 4.5 cents wider than the February 2012 average, 3 cents wider than the February 2011 average, and about 6 cents wider than the February 2010 average. 

Sources stated that there has been downward pressure on the Gulf Coast heating oil paper contract due a shift in the NYMEX heating oil sulfur requirement to 15 ppm from 2,000 ppm, which affects the April swap. Gulf Coast heating oil paper has always had light volumes, but with the shift occurring, liquidity has been wiped out further down the curve. 

The strength of ULSD has added to the expansion of the spread. The front month contract is strong for this time of year. The March differential is trading about 6.75 cents higher than the February 2012 average and 3.75 cents higher than the February 2011 average.